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Inside a Slaughter: Why Freeport McMoRan Lost 16%

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The massive drop had nothing to do with the commodities it produces, but rather a questionable business move that left many scratching their heads.

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Trading in the overall market was relatively normal yesterday; your average worry about the fiscal cliff and Europe snuck their way in, but there was nothing out of the ordinary. That is, until you looked at Freeport-McMoRan's (NYSE:FCX) stock for the day. This major copper and gold producer was absolutely slaughtered, as investors participated in one of the nastiest sell-offs we have seen in recent weeks. But the massive drop had nothing to do with the commodities it produces, but rather a questionable business move that left many scratching their heads.

Inside the Sell-Off

Let's start with the sheer volume of this move. As of yesterday, FCX traded around 14 million shares on an average day; Wednesday's session watched over 153 million shares exchange hands, more than 10 times the average volume. The stock price dropped from $38.28 to $32.16 during the day, representing losses of 15.99%. But the hit, unfortunately, has yet to stop. As of the first 30 minutes of trading this morning, the stock traded more than 18 million shares (eclipsing their new average daily volume of 17.1 million shares) and was down nearly 4%. FCX is currently at its lowest point in the trailing 52-weeks.

So why the sudden apocalyptic sell-off? Yesterday, Freeport announced that they would be acquiring McMoRan Exploration (NYSE:MMR) and Plains Exploration & Production (NYSE:PXP). This move was seen as highly controversial, one of the largest shareholders of the stock said that the management of Freeport had broken shareholder trust. "I haven't heard anything on this call that in any way justifies why these companies should be put together," said Evy Hambro, a managing director at BlackRock (NYSE:BLK), during a conference call to discuss the deal.

Though FCX was subjected to an absolute slaughter, both McMoRan Exploration and Plains Exploration & Production had astonishing trading sessions. MMR hit its 52-week high by jumping from $8.46 to $15.82, a gain of 87%. That stock also traded more than 86 million shares on Wednesday, crushing its average of around 4 million shares. PXP shot up from $36.05 to $44.50, a gain of 23.4%. PXP traded nearly 57 million shares though it had been averaging under 4 million shares prior to the acquisition.

What to Do With FCX?

The big question that investors need to ask themselves is whether or not this will have a marked impact on the long-term health of the company. After all, we have seen a number of acquisitions looked on unfavorably by the market, only to watch the stock regain lost ground once the news blows over. If you fall under that camp, FCX is at an absolute steal right now, and it may be time to either add to or start a position in the stock.

However, if you are less than a fan of the new deal and see long-term ramifications for FCX, you are in a bind. Selling right now will certainly protect you from further losses, but when a sell-off of this magnitude occurs, there is typically a small recovery in price shortly afterwards. It may be worth placing a stop-loss at your absolute minimum and waiting out to see if FCX can gain back some lost ground before you exit.

Follow us on Twitter @CommodityHQ

Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
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No positions in stocks mentioned.
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